The Family Run Tech Business

If you live in the world of venture-funded companies you may not have seen many software or hardware businesses that fit the traditional definition of a “Family Business”. But the vast majority of tech companies out there aren’t funded by institutional capital. Most are started the good old fashioned way: self-funded, with an idea and just a few people to fill a need in a niche market.

With luck (and a lot of sweat equity) these “life style” companies grow into stable small businesses–and sometimes very substantial companies.

Among these lifestyle companies a significant segment fall into the category of a family business.

This in my mind is not necessarily a good thing or a bad thing–it depends strictly on the details of the individual situation. There are world-class software and hardware companies controlled and run closely by families. On the other end of the spectrum are some of the worst-run, dysfunctional tech companies you can imagine–the very caricature of the nightmare family business.

A few years back I briefly worked with a family-run software business that unfortunately fit the latter category. The founder was still nominally CEO but seen rarely and when he was it would be in sporadic short bursts. He was enigmatic at best and was widely feared by the employees due to erratic behavior, including swift firings for unknown offenses. He had installed his 20-something son as president who was running the company “day-to-day”–to the extent it was being run. He was nearly as erratic as his father and evoked nearly as much fear, as well as considerable loathing. Decisions appeared arbitrary and based upon the mood of the moment, often coming down from the top by fiat. There was no one there to call out either the CEO or president on their often curious decisions and behavior–it was a classic situation of the “emperor having no clothes”.

There were several other daughters, daughter’s-in-law and other family members holding high positions–with more children still too young but considered eventually on the way into the family business. In addition, there were a number of friends of family members in positions higher than their qualifications would otherwise warrant. None of the family members were held in high respect by the other employees and the environment was punctuated by constant gossip and complaints about the latest nepotism-driven folly. Even the friends of the family who held nice jobs due to their connections often joined in on the trashing. The cultural well of this company was poisoned beyond hope and the company is stuck in neutral, even though they’re in a great, fast-growing market segment.

Nepotism isn’t always a fatal flaw, however. I also know of a large publicly traded technology company, wildly successful, which is still run to a large extent as a family business. This company also contains quite a bit of nepotism which hasn’t helped from a corporate culture perspective. But they’ve done so much else right they’ve overcome this weakness.

I have come across other software companies which were family-founded with several family members in leading management positions–all very competent and the companies quite successful. Tech companies are often complex animals and success or failure can’t easily be defined by a single characteristic. But as I implied above, family-run tech businesses are a unique situation–whether a company is great or awful often depends on the positive of or negative qualities of this single founding family. The result of this concentration of power is that family companies at their best can be among the cream of the crop; at their worst, they can be the most dysfunctional companies of all.

So what are the best practices a founding family can follow to optimize the performance of this important asset, all while retaining the unique qualities of the “family business”? Let me offer a few suggestions:

Objective & Transparent Evaluations

Maybe the most important thing for a family-run business to embrace is OBJECTIVITY. It becomes very easy for the controlling family to get into the habit of deciding things in private with their own subjective decision-making process. This is fine as long as the company essentially IS the family. However, once a company grows large enough that there are a significant number of non-family members who depend upon the company for their living, this can become problematic. If you want a motivated workforce, objectivity and transparency are generally critical components in building a positive culture, as discussed in the next item.

Build and Protect a Positive Corporate Culture

As mentioned above, once you’re hired employees outside the immediate family, you have a corporate culture to worry about. An arbitrary or secretive decision-making style can really poison the cultural well. Whether it’s deciding on the big-picture company strategy or something as personal as performance reviews and promotions, employees need to feel they’re part of it–family members or not. If everyone doesn’t believe that they are involved — and stand to benefit –issues will begin to build. At best you’ll end up with an obedient but not highly motivated workforce. At worst, you’ll end up with a palace revolt at your doorstep. In either case, it’s not the best way to create value for the family in the long run. To maximize value creation via corporate culture, treat your employees to the greatest extent possible as partners(owners), not like any other disposable asset (desk chairs). Owners work much harder than lemmings.

Independent Board

Even though the real board of a family run company is the family itself, I still feel there is value to appointing an independent board to at least advise if not oversee the company. The key is that it needs to be made up of strong, independent folks who don’t have close personal connections to the company. If you fill it with trusted friends, cronies and hanger-ons, it won’t serve much of a purpose. This board needs to protect the family from itself, especially the “emperor has no clothes” syndrome that can occur due to isolation of the “elite” family members who are running the company far from their mainstream employees. If this board won’t speak up and tell the truth, no matter how difficult–it won’t be worth the trouble of putting it together.

Family Member doesn’t ALWAYS have to run the company

There is a strong tendency in family businesses for a family member to be the CEO, for obvious reasons. But is this always the right thing to do? Some generations of families are stronger at business than others. Not everyone is cut out to be CEO or an executive VP, but might serve the company well in an individual contributor role. It’s important to find the right level/spot for each family member–too often there is pressure to push relatives into roles they are poorly suited for. In addition, some family members don’t belong in the business at all and in this case it’s better for all concerned to let them find their own way. In any of these cases all family members can still benefit as shareholders. Lastly, if there really isn’t a family member at a particular point in time with the right mix of leadership, experience and technical skills to be CEO–why not appoint a trusted unrelated professional as caretaker to run the company while family members of the next generation are groomed for leadership? This may be the best move to preserve the company as a family asset for all concerned in the long run.

Hold Family Members to a HIGHER standard

If you privately asked most employees of family run companies who AREN’T members of the controlling family, undoubted you would hear many stories of nepotism. There is a basic assumption that family members in companies receive special treatment. The leaders of some family-run companies wouldn’t even deny this and some feel it’s not only their right but the right thing to do. But once your company reaches a certain size, this can really reduce the motivation of other employees and damage the overall company performance. Even when it isn’t true, simply this assumption of preferential treatment can be damaging. Appearances really matter–perception becomes reality from a company culture perspective. Because of this, I strongly recommend that family members are held to the highest standard possible–even higher than other employees. Promote family members a year late rather than a year early; plan ahead and make sure family members gather impeccable credentials for their role. If a family member and non-family member bring different views on a topic, make sure the non-family member can win the day if they bring the stronger argument.

If you follow some of the practices I’ve laid out here, I believe you’ll have a stronger chance of the best of both worlds–a tightly-run, focused business which also benefits from strong employee contributions to build a valuable asset for the family in the long run.

What are your thoughts on best management practices for family run businesses? I’d love to hear your own experiences. Post a comment so we can all benefit from your experiences.

About Phil Morettini

Phil Morettini is the author of the Morettini on Management Tech Blog and President of PJM Consulting. Mr. Morettini has an extensive C-level software and hardware company executive background. PJM Consulting provides management consulting and interim management services to technology companies.